Financial Crises and the Politics of Macroeconomic Adjustments

275 Pages·2013·3.41 MB·English

by  Stefanie Walter

Financial crises and the Politics oF
MacroeconoMic adjustMents
When are policymakers willing to make costly adjustments to their
macroeconomic policies to mitigate balance-of-payments problems? Which
types of adjustment strategies do they choose? Under what circumstances do
they delay reform, and when are such delays likely to result in financial crises?
To answer these questions, this book examines how macroeconomic policy
adjustments affect individual voters in financially open economies and argues
that the anticipation of these distributional effects influences policymak-
ers’ decisions about the timing and the type of reform. Empirically, the book
combines analyses of cross-national survey data of voters’ and firms’ policy
evaluations with comparative case studies of national policy responses to the
Asian financial crisis of 1997–8 and the recent global financial crisis in Eastern
Europe. The book shows that variation in policymakers’ willingness to imple-
ment reform can be traced back to differences in the vulnerability profiles of
their countries’ electorates.
Stefanie Walter is Full Professor for International Relations and Political
Economy in the Department of Political Science at the University of Zurich. Prior
to joining the University of Zurich, she held positions as Fritz-Thyssen-Fellow
at Harvard University and Junior Professor for International and Comparative
Political Economy at the University of Heidelberg. Her research concentrates
on the fields of international and comparative political economy, with a par-
ticular focus on how distributional conflicts, policy preferences, and institu-
tions affect economic policy outcomes. Her work has been published, inter alia,
in Economics & Politics, European Journal of Political Research, International
Organization, International Studies Quarterly, Review of International Political
Economy, and World Development. She received her PhD in Political Science
from ETH Zurich.

Political Economy of Institutions and Decisions
series editors
Stephen Ansolabehere, Harvard University
Jeffry Frieden, Harvard University
Founding editors
James E. Alt, Harvard University
Douglass C. North, Washington University of St. Louis
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Lee J. Alston, Thrainn Eggertsson, and Douglass C. North, eds.,
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Economics, Politics, and Institutions, 1865–1965
James E. Alt and Kenneth Shepsle, eds.,
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Josephine T. Andrews,
When Majorities Fail: The Russian Parliament, 1990–1993
Jeffrey S. Banks and Eric A. Hanushek, eds.,
Modern Political Economy: Old Topics, New Directions
Yoram Barzel,
Economic Analysis of Property Rights, 2nd edition
Yoram Barzel,
A Theory of the State: Economic Rights, Legal Rights, and the Scope of the State
Robert Bates,
Beyond the Miracle of the Market: The Political Economy of
Agrarian Development in Kenya, Second Edition
Jenna Bednar,
The Robust Federation: Principles of Design
Charles M. Cameron,
Veto Bargaining: Presidents and the Politics of Negative Power
(continued after Index)
For Jörn, Nils, and Lukas
Financial Crises and the Politics of

Macroeconomic Adjustments

StEfanIE WaltEr
University of Zurich
32 Avenue of the Americas, New York NY 10013-2473, USA
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Information on this title: www.cambridge.org/9781107028708
© Stefanie Walter 2013
This publication is in copyright. Subject to statutory exception
and to the provisions of relevant collective licensing agreements,
no reproduction of any part may take place without the written
permission of Cambridge University Press.
First published 2013
Printed in the United States of America
A catalog record for this publication is available from the British Library.
Library of Congress Cataloging in Publication data
Walter, Stefanie.
Financial crises and the politics of macroeconomic
adjustments / Stefanie Walter, University of Zurich.
pages cm. – (Political economy of institutions and decisions)
Includes bibliographical references and index.
ISBN 978-1-107-02870-8 (hardback)
1. Economic stabilization – Political aspects.
2. Financial crises. I. Title.
HB3732.W35 2013
339.5–dc23 2013009472
ISBN 978-1-107-02870-8 Hardback
Cambridge University Press has no responsibility for the persistence or accuracy of
URLs for external or third-party Internet Web sites referred to in this publication
and does not guarantee that any content on such Web sites is, or will remain, accurate
or appropriate.
Contents
List of Figures page x
List of Tables xii
Preface xiii
1. Introduction 1
1.1 Why Macroeconomic Adjustment Becomes Necessary 4
1.2 How and When Do Policymakers Adjust? Existing
Explanations 7
1.3 The Argument 14
1.4 The Plan of the Book 22
2. Individual Vulnerability to Macroeconomic Adjustment 27
2.1 The Distributional Effects of External Adjustment 31
2.2 The Distributional Effects of Internal Adjustment 42
2.3 The Vulnerability Profile and Voters’ Preferences on
External and Internal Adjustment 49
2.4 Conclusion 52
3. Direct Vulnerabilities to Adjustment: European Voters in the
2008–2009 Global Financial Crisis 54
3.1 Voter Evaluations of Economic Policy Outcomes during the
2008–2010 Global Financial and Economic Crisis:
Research Design 57
3.2 How Exchange Rate Changes Affect Voters Vulnerable to
External Adjustment 65
3.3 How Internal Adjustment Affects Voters’ Evaluations of the
Severity of Crisis Repercussions 69
3.4 Conclusion 74
vii
viii Contents
4. Indirect Vulnerabilities to Adjustment: The Determinants of
Firms’ Monetary and Exchange-Rate Policy Preferences 78
4.1 How Firms Assess Their Vulnerabilities to Exchange-Rate
and Monetary Policy 81
4.2 The Determinants of Firms’ Vulnerabilities to External
Adjustment 88
4.3 The Determinants of Firms’ Vulnerabilities to Internal
Adjustment 95
4.4 Firms’ Overall Vulnerabilities to Macroeconomic
Adjustment 99
4.5 Conclusion 106
5. Interests, Elections, and Policymakers’ Incentives to Adjust 110
5.1 To Adjust or Not to Adjust? And If So, When and How?
The Government’s Decision Problem 111
5.2 The Voter’s Viewpoint: Policy Outcomes and Vote Choice 114
5.3 How the Electorate’s Vulnerability Profile Affects
Policymakers’ Choices about the Speed and
Type of Adjustment 121
5.4 Conclusion 128
6. Adjustment in the Asian Financial Crisis 131
6.1 Thailand: Delayed Adjustment and Exchange-Rate Crash 134
6.2 Taiwan: Speedy External Adjustment 145
6.3 Hong Kong: Immediate Internal Adjustment 154
6.4 South Korea: Delayed Adjustment and Exchange-Rate
Crash 164
6.5 Conclusion 177
6.6 Appendix: List of Interviewees 179
7. Adjustment in Eastern Europe during the Global Financial
Crisis 181
7.1 Eastern European Responses to the Global Financial and
Economic Crisis 186
7.2 Vulnerabilities to Internal and External Adjustment across
Eastern Europe 193
7.3 The Distributional Politics of Adjustment to the Global
Financial Crisis 205
7.4 Conclusion 215